Certified Financial Consultant (CFC) Practice Exam

How is an insurance policy defined?

1. A verbal agreement of benefits

2. A written instrument of insurance contracts

3. An informal agreement between parties

4. A summary document stating terms

The correct answer is: A written instrument of insurance contracts

An insurance policy is defined as a written instrument of insurance contracts because it serves as a formal agreement between the insured and the insurer. This document outlines the coverage provided, the terms and conditions of the policy, premiums, deductibles, and any exclusions or limitations. It acts as a legally binding contract that both parties can reference in the event of a claim, ensuring that there is a clear understanding of the rights and responsibilities of each party involved. In contrast, other options do not accurately capture the nature of an insurance policy. A verbal agreement of benefits does not provide the legal enforceability and clarity that a written document does. An informal agreement between parties lacks the formality and precision needed in insurance transactions, making it susceptible to misunderstandings or disputes. Similarly, a summary document stating terms may not encompass the comprehensive details and legal stipulations that a thorough insurance policy provides. Hence, the written instrument is pivotal in defining the contract's specifics and ensuring protection and accountability for both parties.